July 24, 2014

What's the difference between the U.S. Congress and corrupt petty officials taking bribes at a Third-World border crossing? Only one of scale.

Corruption ceases to be corruption when it becomes the Status Quo; what was once recognized as corruption is seen as just another cost of doing business. Our political order is structurally corrupt: the key dynamic in every level of governance is favoritism and extortion.

Favors must be bought: those foolish enough not to spend freely on lobbyists and campaign contributions find their competitors have gained the upper hand by buying favors such as tax breaks, federal subsidies, no-bid contracts, cost-plus contracts, backroom deals, regulations that exclude competition and so on.

Politicos must extort campaign contributions from the maximum number of supplicants seeking favors to maintain their perquisites and power.

Here's how the system works.

There was much mainstream media hand-wringing and outrage in response to corporations moving their place of business offshore to lower their taxes. This outrage is completely misplaced--and indeed, seems designed to misdirect attention away from the systemic corruption that is the beating heart of the American political order.

Let me explain how favoritism becomes the Status Quo. There are two key dynamics at work.

1. Onerous, uncompetitive taxes and/or regulations. The U.S. corporate tax rate is 35%, the highest in the world, and various observers estimate the average state corporate tax tacks on another 4.1% for a total corporate tax rate of 39.1%.

This is roughly three or four times the nominal and effective corporate tax rates in competing nations.

The heavier and more asymmetrical the burden, the greater the incentive to find a way to lighten the load. This is why nations with asymmetrical tax rates and collection practices are inevitably hotbeds of black market activity, as those few chumps who actually pay the official tax rate go out of business or struggle to make ends meet while their black market competitors are living high on the hog.

The injustice of such a system fuels the need and desire to buy favors to escape the burden that virtually nobody actually pays.

2. Once a significant percentage of participants have eased their burden by buying political favors, everyone else is forced to wonder why they should continue paying the high taxes when others are avoiding them.

This system is not accidental. The asymmetry feeds the need to buy political favors, and is thus a form of systemic extortion. If you refuse to pay the bribe at a Third-World border crossing, the Powers That Be will make sure your life becomes increasingly miserable; while those who ponied up the bribe breeze through the paperwork, you wait and wait and wait, and are told to fill out more paperwork.

In precisely the same fashion, those who refuse to bribe legislators and key political players find their tax rates are crushing and life is miserable indeed. This is known as pay to play, and it defines the U.S. political order.

Those who don't pay the extortion to congresspeople and lobbyists are punished by a system designed to force every participant to pony up the bribe or suffer the consequences.

In other words, U.S. corporate taxes are extortionist and unfairly applied by design, to guarantee every corporation has to buy favors from politicos intent on stripmining billions of dollars in pay to play "contributions."

I know many people feel corporations should pay high taxes because they did so in the 1950s, but this historical precedent is blind to the realities of a global economy. Given global sales and workforces, why should a company headquartered in the U.S. pay punishing U.S. tax rates on its global operations?

Is it good policy to burden our corporations with absurdly complex tax codes and rates so far above global norms that every U.S.-based company is forced to seek tax avoidance schemes just to remain competitive and meet shareholder demands to be as profitable as others in the same global space?

It's easy for pundits protected by academic tenure to criticize corporate management, but put yourself in the shoes of a pension fund that owns stock in a company that actually paid the full 35% while competitors used strategies bought by political favors to eliminate that burden: your dividends and capital gains would be significantly lower as a result of the corporation's refusal to use pay to play tax avoidance strategies.

The reality is the pension fund manager and the corporate managers would both be fired for underperformance if they were stupid enough to pay the full corporate tax rate or insist on the company doing so.

We have a double standard: as individuals, we seek every possible avenue to escape high Federal taxes, and the wealthier you are, the more avenues are open due to favors bought from an always willing to wheel-and-deal Congress.

Yet we publicly demand corporations pay absurdly asymmetric tax rates to qualify as "good corporate citizens."

Corporations don't exist to be good citizens. As noted above, anyone clueless enough to pay the 35% federal tax rate on all net earnings will have failed the shareholders, who naturally demand the same payout in dividends and capital gains as those earned by competitors who paid to play and avoided most or all U.S. taxes.

Systems of good governance make exceptions and favors difficult to gain and the process transparent.

Corrupt governance makes exceptions and favoritism the unspoken rule and the process of buying them hidden from public view. That defines the U.S. political order perfectly.

Soaring corporate profits make juicy targets for taxes:

Soaring profits are the engine of a rising stock market:

Wages have stagnated while profits have soared:

It's easy to see why people want to tax corporations heavily, but in thinking this they are playing right into the extortionist/pay to play political order.

A fairer, good-governance system would lower corporate tax rates to the equivalent of an excise tax and exclude favors and exemptions. A corporate tax rate of 5% that was applied to all corporate sales and earnings in the U.S. regardless of where the company was nominally based would raise more money than the current corrupt system in which many corporations pay almost nothing and chumps who failed to pay the required bribes pay a globally asymmetric rate as punishment for their failure to 'contribute" to the campaigns of incumbents.

A low, evenly applied corporate tax rate would destroy the pay to play system of extortion/bribery, and as a result it will never be adopted. The U.S. political order is systemically corrupt and is incapable of self-reform. The rot has seeped into every nook and cranny of the political order, to the point that it's now accepted as "the way we do business here."

What's the difference between the U.S. Congress and corrupt petty officials taking bribes at a Third-World border crossing? Only one of scale. The corrupt petty officials can only look with envy on the Congressional extortion machine.